Tax Codes – what do all those letters and numbers mean?

Have you ever wondered what your tax code means, and why you may have a different code to your friends or colleagues, as if you have nothing else to talk about in the canteen.

Some parts of the tax code are more obvious than others but we hope that this article helps explain things so that you can understand why you are being taxed at a certain rate.  Should you believe that your tax code is incorrect then you will need to contact HMRC directly as unfortunately even if your employer believes the code to be wrong they can not change it for you.

1100L

1100L is the standard tax code for most people (born after 5 April 1938) for the current (2016-17) tax year.  If this is your tax code then it means that you do not pay any PAYE (tax) on the first £11,000 you earn during the year, unfortunately this allowance isn’t given all in one go, you get 1/12th of the annual allowance (approximately £916) per month tax free.

Your personal tax code could be higher or lower than 1100L dependent on your circumstances, i.e. whether you have unpaid tax from a prior year or you have tax relief due on charitable contributions.

Tax Code Letters

The letters in your tax code can mean a number of different things.

LetterWhat it means
LIndicates that the value preceding is your tax free personal allowance
MIndicates that you have received a transfer of 10% of your partners personal allowance (Marriage Allowance)
NIndicates that you have transferred 10% of your personal allowance to your partner (Marriage Allowance)
SThe S would precede the numeric value of your tax code and indicates that tax is paid inline with the Scottish Rate of Income Tax, for the current tax year this is the same as the rest of the UK but may change in future years
TThis typically indicates a temporary tax code or a code that has other amounts factored into it. Also used for individuals who earn over £100k at which point you start to lose your personal allowance.
KThis is used when the level of your untaxed income/benefits exceed your personal allowance
0TYou do not have any personal allowance remaining and do not have any tax free pay. This code would typically be used if your earnings were in excess of £122k or if you did not provide your new employer with a P45 or starter declaration
BRAll of your income from this employment/pension is taxed at the basic rate, currently 20%
D0All of your income from this employment/pension is taxed at the higher rate, currently 40%
D1All of your income from this employment/pension is taxed at the additional rate, currently 45%
NTYou do not have to pay any tax on this income

Tax Basis M1/W1

Many individuals do not have either a M1/W1 marker against their tax code, when this is the case your taxable pay for the current year is completely recalculated each month and the amount of tax you have paid so far for the year is deducted from the total amount now due, this is known as a cumulative tax code and you receive an additional 1/12th of all allowances and bandings each month.

If you are on a M1/W1 tax code it means that only your income for that pay period is looked at in calculating the tax due on your pay, the HMRC sometimes refer to codes that are M1/W1 as being emergency tax codes.

50% threshold

Should you have underpaid tax earlier in the tax year or be on a K code which adds a high level of additional liability to your earnings you are protected by an automatic 50% threshold to prevent employers and pension providers from taking more than half of your pre-tax wages as tax.

Changes to tax codes

Typically tax codes only change at the beginning of a new tax year (6th April) as normally the government increases the personal allowance at this time (set to become £11,500 from 6th April 2017).  However there are occasions when HMRC changes codes during the tax year, either on receipt of new information from your employer (P11D) or from yourself.  If you believe that your tax code is incorrect then you need to contact HMRC directly to arrange for them to amend this.  Once HMRC have amended your tax code they will usually send this directly to your payroll provider to allow your pay record to be updated.  At this point dependent on the tax code and tax basis you may be lucky enough to receive a tax refund.

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